Mortgages.

Good As Gold

New Low-down Loan Aids Buyers On Tight Budgets

November 06, 1994|By Jim DeBoth. Special to the Tribune.

Aspiring home buyers on tight budgets got a boost recently when the Federal Home Loan Mortgage Corp., or Freddie Mac, introduced a new "Affordable Gold" program to its national network of local lenders.

The loan will fund up to 95 percent of a home's cost-and lenders have plenty of flexibility in working out a deal on the 5 percent down payment by accepting funds from gifts, loans, and other sources.

The aim of the program is to help more buyers win approval for their loan applications. Even low-income buyers could benefit from this product, according to its proponents.

This is good news for home buyers, because it means that this type of loan product-successful in pilot projects dating back to 1992-will now be available on a nationwide basis. Local lenders may market it under the name "Affordable Gold" or other names.

Lenders already are aggressively reaching out to communities to make these kinds of loans.

"It will make a difference," said John Watson, vice president and loan production manager for Mellon Mortgage Co. in Houston. "If you work it right, you can get into a house with this loan for 3 percent (down). That's about as inexpensive as you can get for a house."

Under the 3/2 option, the borrower could contribute only 3 percent of the home's value and use a number of sources for the remainder of the down payment, such as gifts from relatives and other sources or grants such as those offered by non-profit housing groups.

Qualified buyers can also get second loans to pay closing costs at rates and terms identical to the first loan. Fixed-rate loans are available for 15-year to 30-year terms. Refinancing is allowed, up to 90 percent of the home's value.

"We've opened up the loans to a wider income range," said Matt Miller, director of affordable housing at Freddie Mac in Washington.

Part of Freddie Mac's mission is to provide funds to expand homeownership to people who traditionally were shut out of the market or were just marginally qualified to buy.

Setting a single cutoff point for income would have been too restrictive, so Freddie Mac developed some guidelines to benefit lower-income buyers and specific areas such as central cities or rural regions where the loans are needed most to help neighborhoods strengthen and grow.

One big advantage is that there are no income restrictions if the buyer can provide a 5 percent down payment from his or her own cash, and will buy in the central cities, or in rural tracts where the median family income is less than 80 percent of area median income.

This also applies to census tracts where minorities form more than 50 percent of the population and to housing revitalization target areas.

However, when the down payment is less than 5 percent of the borrower's own funds, the borrower's income is limited to 100 percent of area median income. (Exceptions are made for high cost areas such as California, New York, Boston and Honolulu, where the limits range from 120 to 170 percent of median income.)

Lender requirements have been rewritten, too, to make it easier to approve qualifying loans. This will be invisible to most consumers, but some of these changes, such as the level of cash reserves required, and the relaxation of qualifying ratios, actually are more important in lenders' ability to make the loans.

"You might say there is a lower hassle factor. This mortgage has more flexibility on its mortgage insurance coverage. It is more liberal than others and we use it in our community lending efforts," said a spokesperson for PNC Mortgage Corp. in Vernon Hills.

Lenders commenting on the loan say it is good because it gives consumers more choice.

"We buy into the concept," of affordable loans, said Eduardo Camacho, urban lending manager at St. Paul Federal Bank for Savings' Chicago central office. "There are people who would benefit from this kind of program. (But) it depends on the extent to which our outreach programs are successful."

There are more than a dozen loan programs already in the growing category known as "the affordable or community home buyer loans" at St. Paul.

Lenders like to originate loans that meet Freddie Mac guidelines because that gives them the option to generate more funds if they sell the loans to Freddie later on. They can also hold them in the local bank portfolio if that's more profitable.

As with many such affordable loans, borrower education programs are required, because lenders are supporting efforts to find and inform new buyers.

It"s been found that a buyer who completes a homeowner education course is as good a risk as one who can put a larger down payment into the house. However, if you can contribute at least five percent down, the education requirement can be waived.

It will take a while for this product to work its way into the menus of mortgage lenders, but once it does it will become a tool to help lenders match more buyers to residential properties.